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SUPPORTING INDUSTRIES IN VIETNAM: DETERMINANTS OF ENTERPRISE PERFORMANCE

Ngày Đăng: 28/10/2013

Submitted Date: 2013 July 16

SUPPORTING INDUSTRIES IN VIETNAM:

DETERMINANTS OF ENTERPRISE PERFORMANCE

 

Faculty                                  : Graduate School of International Cooperation Studies

Department                          : International Economics and Policies

Academic Advisor              : Nobuaki MATSUNAGA

Name                                     : NGUYEN Thi Mai

 

TABLE OF CONTENTS

ABBREVIATIONS. ii

ABSTRACT. iii

ACKNOWLEDGEMENTS. iv

CHAPTER I: INTRODUCTION.. 1

1.    Research background. 1

2.    Research objectives. 2

3.    Contribution and significance of the research. 3

4.    Organization of the thesis. 3

CHAPTER II: LITERATURE REVIEW... 4

1.    Supporting industries development and policies. 4

2.    Determinants of enterprise performance. 5

CHAPTER III: CURRENT STATUS OF SUPPORTING INDUSTRIES IN VIETNAM... 8

1.    Concept of Supporting Industries. 8

2.    The role of SI. 10

3.    SI enterprises. 10

4.    Local procurement of Materials and Parts. 12

5.    SI development policies in Vietnam.. 14

CHAPTER IV: METHODOLOGY.. 17

1.    Econometric Model 17

2.    Data and variables. 18

3.    Measurement and Summary of Variables. 21

3.1.     Firm performance variable. 21

3.2.     Firm characteristic variables. 21

CHAPTER V: RESULTS AND DISCUSSION.. 25

CHAPTER VI: CONCLUSION AND POLICY IMPLICATION.. 32

REFERENCES. 36

APPENDIX.. 40

ABBREVIATIONS

AFTA              Asian Free Trade Area

ASEAN          Association of Southeast Asian Nations

CIEM              Central Institute of Economic Management

DANIDA        Danish International Development Agency

DDPR                         Domestic Direct Procurement Rate

DIPR               Domestic Indirect Procurement Rate

FDI                 Foreign Direct Investment

FIEs                Foreign Invested Enterprises

GSO                General Statistics Office

ILSSA             Institute of Labour Science and Social Affairs

JETRO            Japan External Trade Organization

METI              Ministry of Economy, Trade and Industry

MITI               Ministry of International Trade and Industry

MNCs             Multinational Cooperations

PSDC              Penang Skill Development Center

R&D               Research and Development

ROA               Return on Assets

SI                    Supporting Industries

SMEs              Small and Medium Enterprises

SOEs               State-owned Enterprises

TFP                 Total Factor Productivity

VDF                Vietnam Development Forum

VND               Vietnamese Dong

WTO               World Trade Organization

ABSTRACT

Supporting Industries play an important role in attracting the FDI inflows and strengthening the economic competitiveness in Vietnam. This thesis examines the performance of Vietnamese micro and small enterprises in supporting industries utilizing the firm-level 2009 data. By employing the Cobb-Douglas specification, an econometric approach, this study analyses 298 micro and small enterprises in supporting industries to investigate the determinants of firm performance. It is found that higher education of entrepreneurs, access to formal credit, innovation through product improvement, and business registration have a positive association with firm performance. In addition, the results reveal that there is significant difference in firm performance among different industry sectors, ownership types and locations. The automobile/motorcycle and machinery supporting industries are found to have positively significant differences in firm performance compared with garment-footwear supporting industries. Enterprises located in the south are shown to have better performance than in the central part. In terms of ownership types, household enterprises are found to underperform other ownership forms such as private enterprises and joint stock companies. Policy recommendations derived from the empirical evidence are also presented in this study.


 

ACKNOWLEDGEMENTS

This paper is written as my thesis for the Master of Economics in Graduate School of International Cooperation Studies (GSICS), Kobe University.

I would like to express my sincere appreciation to Professor Nobuaki MATSUNAGA, and Assistant Professor Souksavanh Vixathep for their invaluable intellectual guidance and support as my thesis advisors at Kobe University. They always provided detailed and timely feedback on my paper, gave me useful comments and suggestions to facilitate my research.

I am very grateful to my friends who have followed my studies with interest and offered support in completing this thesis. The weekly seminar in GSICS has been a useful forum to broaden my understanding, with many interesting presentations and discussions. I have benefited from discussions with my friends in class and the seminar.

My special thanks go to Doctor Patricia Boyle for her guidance on the academic English writing, which is important to finalize the thesis.

I would like to gratefully acknowledge my gratitude to The Asian Development Bank (ADB) – Japan Scholarship Program (JSP) for providing a scholarship for my Master’s Course in Kobe University, a good opportunity for me to pursue my study for my future career.

Last but not least, I would like to acknowledge my family in Vietnam – my parents, my brother and sisters – for their continued support and encouragement so that I could complete this thesis.

NGUYEN Thi Mai

2013 July 16

 


 


CHAPTER I

INTRODUCTION

1.Research background

Supporting industries (SI) are domestic enterprises which either supply parts and components to assembler firms or conduct intermediate processes in the production of goods. Such industries play an important role in developing economies including Vietnam. SI development is considered to be a practical contribution to improving the quality of growth and autonomy for a developing economy. SI development will help expand the input sources for a wide range of suppliers, reduce production costs, and increase competitiveness. Moreover, a developed SI will provide local manufacturers with opportunities to incrementally increase their internal production capability, to join production systems of multinational companies, as well as global production systems. In addition, SI development promotes the development of small and medium enterprises (the majority of SI enterprises being SMEs), and creates a diversified and extensive business network. SI also increases the competitiveness of national industry and makes up for the declining strength of cheap labor in developing countries like Vietnam. This competitiveness is one of the key elements in attracting the FDI inflows. Therefore, in the case of Vietnam, building a powerful SI has become an urgent task in its economic development strategy to become an industrialized country in the next decade, as anticipated in the Socio-economic Development Strategy 2011-2020.

Vietnam has had more than two decades of industrialization and integration (since 1986 when the government enacted the Doi Moi[1] policy), joining major organizations such as the World Trade Organization (WTO), and Asian Free Trade Area (AFTA). According to the Ministry of Industry and Trade, Vietnam annually spends US$100 billion for imports, including over US$ 23 billion (23%) for machinery and equipment. The locally made inputs proportion accounts for around 25 – 30% in many key industries. This is evidence of the weak performance of domestic supporting industries. Compared with the two neighboring Asian economies, Thailand and Malaysia, which have become major suppliers for parts and components for automobiles and electronics in the world market, Vietnam’s SI is currently relatively undeveloped and lacks incentive policies to accelerate its growth. Vietnam adopted the term “SI” relatively late in 2003 and first recognized the importance of SI when the Vietnam – Japan Joint Initiative was launched in 2003 to strengthen the economic competitiveness through promotion of FDI inflows into Vietnam. The required actions specified in the initiative were the “development, introduction, and utilization of SI in Vietnam”.[2] The SI development framework policy has been formed and is slowly being improved via Decision 12/QD-TTg on SI development prioritization in 2011 and Decision 1483/QD-TTg on the list of prioritized SI product development. Most recently, the Ministry of Industry and Trade submitted and received Prime Ministerial approval in Decision No. 1556/QD-TTg dated Oct 17, 2012 on approving the Scheme “Supporting the Development of Medium and Small Enterprises Engaged in Supporting Industries”. The government has set targets to boost the quantitative and qualitative growth of SMEs engaged in supporting industries; for example, ensuring that SMEs engaged in SI supply approximately 50% of the demand for localization of various manufacturing industries. However, instead of giving out specific methodologies to develop the SI, the policies only outline the goals to be achieved but even these have not yet been effectively implemented. SI enterprises have to face many difficulties in finance, human resources, technology and production management, etc. They need the support of the government with appropriate and comprehensive policies and implementation systems. Identifying the determinants of enterprise performance in supporting industries will be significant in order to find the answer to the question of what factors are important for the development of these enterprises, and then to link those findings to policy recommendations to improve supporting industries in Vietnam.

2.Research objectives

This research aims to accomplish two major objectives. First, it aims to describe and analyze the current status of supporting industries in Vietnam. Second, it attempts to explore the influence of the managerial characteristics, financial attributes, and innovation and firm characteristics on the performance of supporting industry enterprises in Vietnam through econometric modeling. Firm characteristics including firm age, location and industry sector are also posited to explain the difference in firm performance in supporting industries.

3.Contribution and significance of the research

This research will contribute to understanding the role and significance of SI enterprises in Vietnam. Most studies about SMEs have been done on the whole sectors such as manufacturing industries and services, with fewer studies in specific manufacturing industries and even fewer in supporting industries. This study contributes to an understanding of the key factors influencing enterprise performance, and provides policy recommendation to enhance efficiency and competitiveness in the supporting industries in Vietnam. In addition, the study is significant as it utilizes firm-level data from surveys on SMEs in the manufacturing sector in Vietnam in 2009.

4.Organization of the thesis

The paper is organized as follows: Chapter I introduces the research background, research objectives and research significance. Chapter II summarizes the findings of the research literature on supporting industry development and policies as well as the determinants of firm performance. Chapter III then turns in detail to analyze the current status of Vietnamese supporting industries. Chapter IV moves the focus to the econometric model, along with a description of the data used in this analysis and Chapter V gives a discussion of the results. The final conclusions drawn from the research and policy recommendations are offered in the final chapter.


 

CHAPTER II

LITERATURE REVIEW

1.Supporting industries development and policies

Mori (2005) states that SI plays an important role in attracting FDI inflows and amplifying FDI’s positive externalities in Vietnam. However, the development of SI seems to be impeded by two types of barriers: the minimum efficient scale problem and information failure caused by the small size of industrial output and by less interaction between MNCs and domestic suppliers, respectively. Mori suggests overcoming these two problems by expanding business volumes with upgraded technology and reducing information failure through the interaction with MNC assemblers. In particular, developing collaborative training programs between MNCs and domestic SI is highly recommended. The success of the Penang Skill Development Center (PSDC), which is an effective collaborative training program in Malaysia, is presented as a useful model.

Ohno (2006) finds that SI in Vietnam remains underdeveloped which limits business opportunities for the foreign invested enterprises. The paper argues that competitiveness and demand size are the two determinants of the development of these industries. In terms of competitiveness, Vietnamese enterprises first need to improve quality and delivery to meet the demand of Japanese assemblers since the standards of Japanese manufacturing is dependent on quality, cost and delivery (QCD). Regarding demand size, the paper indicates that for SI development, a large demand size is extremely important because assemblers require relatively large minimum orders to enter the market, and they are more capital-intensive than the final assembly. Moreover, policies related to training high-quality industrial human resources, and taxes and tariffs, and a stable policy environment should be promoted to accelerate the SI growth. 

Bata (2006) describes quantitatively the procurement structure of SI for key manufacturing categories in Asia. The paper analyzes the industrial relations between ASEAN 4, the Republic of Korea, and Japan with particular focus on the automotive/motorcycle and electrical/electronic industries. Providing formulas for estimating the domestic direct procurement rate (DDPR) and domestic indirect procurement rate (DIPR), the author shows that indirect linkage effects are greater than direct linkage effects in these sectors in Japan, while ASEAN 4 and the Republic of Korea have lower domestic linkage effects in comparison with Japan. Bata emphasizes that local procurement of parts and components benefits both FDI assemblers and local parts suppliers, a finding supported by Ohno and Mori in the same edited volume (Ohno, 2006). Therefore, it is agreed that promoting local procurement is a key to FDI-led industrial growth in developing countries.

Vietnam Development Forum (2010) presents an overview on SI policies in Malaysia and Thailand and offers valuable lessons for other latecomer countries to learn and emulate, with selectivity and modification to suit the reality of each country.  Compared with Malaysia and Thailand, Vietnam’s industrial policy in general and SI promotion in particular remain rudimentary. The author gives the following suggestions: First, Vietnam must start with setting a proper mindset toward the problem. Second, in a choice between the FDI-led strategy accompanied by industrial linkage building and the leapfrogging strategy of creating independent high-tech SMEs without such linkage, Vietnam should opt for the former. Third, a radical organizational reform within the Vietnamese government is needed to initiate SI promotion. Fourth, to implement such organizational reform and SI policies, the crucial role of leaders at all levels cannot be over-emphasized. Fifth, when political commitment and organizational arrangement are secured, Vietnam should embark on the formulation of concrete plans and actions with prioritized road maps and budgetary and staffing mechanisms. 

      Inoue (2002) investigates the contribution of Japan to the SI development in Thailand. He indicates that to build a healthy SI, supporting and developing the small and medium enterprises is of first importance, and the international cooperation between Japan and Thailand in Inoue’s study is emphasized as well.

2.Determinants of enterprise performance

Many quantitative studies on the factors affecting the performance of SME development have been conducted in many countries, especially in developing economies. Most studies are based on quantitative methods to analyze the relationship between the factors related to enterprise development and enterprise performance.

Janice (2005) uses binary logistic regressions to analyze the impact of many factors on training in Australian manufacturing SMEs by employing longitudinal panel data over the period 2004-2008. The results reveal that changes in production technology, product improvement and the introduction of business improvement programs are consistent drivers of increased training in SMEs. The findings also suggest that innovation distinguishes high growth SMEs from their lower growth counterparts.

Ta et al. (2006) examine the determinants of the performance of private enterprises in Hanoi city, Ha Tay province, Ho Chi Minh City and Long An province from 1997 to 2002 using Geroski (1999) model. Capital, infrastructure, market demand, government support for training, finance and legal consultation are revealed to have significant influence on enterprise performance.

Harvie et al. (2010) discuss firm characteristic determinants of SME participation in production networks in most ASEAN countries and China. The empirical investigation utilizes data from an ERIA Survey on SME Participation in Production Networks, conducted over a three month period at the end 2009 to conduct binary choice models (i.e., probit or logit model) to identify the determinants. The study finds that size, productivity, foreign ownership, financial characteristics, managerial attitudes are the important firm characteristics to upgrade SME positions in production networks. The paper also indicates that exporting firms have a high level of productivity.

Le (2010) uses a stochastic frontier production function to estimate the technical efficiency performance of Vietnamese non-state manufacturing SMEs over the period of 2002-2007. It is found that the technical efficiency in manufacturing SMEs in Vietnam is relatively high but differs among different sub-sectors. The analysis reveals that firm size, firm age, urban location, cooperation with foreign partners and government assistance in credit are significant variables affecting firm performance. However, exporting is found to be insignificant in the technical efficiency performance.

Subrahamanya (2011) uses panel data gathered from 157 SMEs for a period of five years (2001-2005) in the auto components, electronics and machine tool sectors of Bangalore to analyze the influence of entrepreneurship, firm level factors and technological innovations to economic performance of SMEs. The study uses step-wise regression to determine the influence of entrepreneurship and other firm level factors to economic performance. The paper indicates that entrepreneurs are crucial for SMEs innovations. Moreover, innovative SMEs tend to achieve better economic performance in the form of higher growth of sales turnover. 

Moorthy et al. (2012) investigate the factors affecting the performance of 300 SMEs in the manufacturing sector in Malaysia. Ineffective entrepreneurship and inappropriate human resource management (HRM) are found to have a significant negative influence on firm performance. Meanwhile, the results show that marketing information and application of information technology significantly contributed to the performance of SMEs.

The important role played by supporting industries in the economic development of Vietnam has attracted the recent attention of academics and policymakers but it still remains relatively unexplored. Moreover, the majority of existing studies are limited to qualitative description of the topic. Much less is known about the actual performance of firm performance in supporting industries. This study aims to contribute to filling the gap in our current knowledge on the determinants of firm performance in supporting industries by conducting a quantitative analysis. In the next chapter, the current state of SI in Vietnam will be described to provide the necessary background to understand the econometric model.

 


 

CHAPTER III

CURRENT STATUS OF SUPPORTING INDUSTRIES IN VIETNAM

1.Concept of Supporting Industries

The term “supporting industries” originated from a Japanese word “susono-sangyo” during the mid-1980s to refer to the general lack of part and component producers in ASEAN. According to the Ministry of Economy, Trade and Industry (METI)[3], SI supplies the necessary things such as raw materials, parts and capital goods for assembly type industries. This term became popular and has been widely used in East Asia ever since. In Thailand, the Master Plan on Supporting Industries in 1995 defines SI as enterprises that produce parts and components that are used in the final assembly processes of the automobile, machinery and electronic manufacturing industries (Ratana, 1999). Vietnam adopted the term SI relatively late, in 2003 when Japan launched the Vietnam-Japan Joint Initiative Phase 1 (2003-2005). In the Action Plan of the Initiative, the first item mentioned the “development, introduction, and utilization of SI in Vietnam”. Then, Phase 2 of the Initiative required the establishment of a master plan for SI development, the setting up of a database of SI, and creating industrial zones for SI (Nguyen, 2006). To meet this requirement, the Master Plan of SI in Vietnam until 2010, Vision of 2020 was approved in 2007. This is the first official document that directly addresses the problems of SI development in Vietnam but there is no clear definition of SI until the government enacted the Decision No. 12/2011/QD-TTG in February 2011 on policies on development of SI. According to this decision, SI means an industry that manufactures materials, spare parts, accessories and semi-finished products for supplying to industries that manufacture and assemble finished products.

      Despite the difference of SI definition among countries, SI has the following common characteristics: (i) SI is more capital-intensive than final assemblers with high fixed cost (Mori, 2005). To manufacture parts and components, the enterprises have to invest in machines and production equipment which costs a large amount of money while the workers are mostly machine operators, quality controllers, technicians, and engineers. Due to this characteristic, SI requires a sufficient capital and skilled labor as well as exclusive technology. (ii) In addition, SI covers a wide scope of manufacturing industries.  According to METI, SI covers the industries supplying parts and components, intermediate goods which share the common processes of materials, plastic molding, forging, casting for the automobile, electric and electronic industries.

Vietnam has a wider scope of SI which adds textile-garment and leather-footwear industries, also. In term of textile-garment, manufacturing and processing of natural fibers such as cotton, jute, hemp, silk worm; synthetic fibers, fabrics; chemicals, additives and dyes; and garment accessories are categorized as supporting industry in this sector, meanwhile tanned leather; leatherette; shoe soles; tanning chemicals; brined hide; shoe sewing thread are referred as the product of leather-footwear supporting industry.

Figure 2: Scope of SI in Vietnam

 

Source: Master Plan of Supporting Industry in Vietnam (2007)

2.The role of SI

SI plays an important role in attracting Foreign Direct Investment (FDI), especially FDI in manufacturing industries. To produce a finished product, material costs (raw materials, parts, ect.) constitute the majority of overall costs while labor costs account for a much lesser proportion[4]. Therefore, though Vietnam has cheap and abundant labor without a healthy SI, it will become a barrier for foreign investors. One FDI enterprise in Vietnam will have the following choice of inputs (i) in-house manufacture; (ii) purchase from local suppliers (including local enterprises and the foreign enterprises in Vietnam); (iii) import from other countries. If parts and components could be supplied through the second choice, this FDI enterprise can reduce the cost of transportation, insurance fees as well as risks occurring during the transportation process if imported from overseas. Moreover, for a FDI enterprise, it is very difficult to produce all the parts and components by itself.  On the other hand, FDI may generate positive externalities for the productivity growth of domestic suppliers through business relationships with Multinational Corporations (MNCs). The output and productivity of domestic SI may increase, due to the additional demand and technology transfer from MNCs (Mori, 2005).

         SI provides inputs to many other industries. Therefore, developed SI will have a big contribution for the development of these industries in particular and for the economy in general. Without solid SI, the assemblers and finished-product manufacturers will depend on import.  This causes the increase in production costs and leads to uncompetitive industries.

3.SI enterprises

Based on the scope of SI mentioned in the Master Plan of SI in Vietnam and statistic data of Enterprise survey of General Statistic Office in 2006, 2007, 2008, the information of SI enterprises is presented as follows:

 

 

 

Table 1: Number of Enterprises in Industry Sector

 

2006

2007

2008

Assembly Industries

6,049

7,039

8,934

Supporting Industries

2,643

3,253

4,161

Total

8,692

10,292

13,095

 

Source: Calculated from the Enterprise Survey in 2007, 2008 and 2009 of GSO, Vietnam

      It can be seen that in the period from 2006 to 2008, there is an increase in the number of enterprises in both assembly industries[5] and supporting industries. However, overall, the number of enterprises in assembly industries dominates with approximately 70% compared to the SI sector with around 30% of the total number of enterprises. This ratio reflects the lack of SI in the country. As the local suppliers are insufficient, the main industries are forced to look for suppliers from abroad. This leads to the situation of “Import to export” in the industrial production of Vietnam, resulting in Vietnam’s trade deficit.

Table 2: Number of Enterprises in Each Industry

 

2006

2007

2008

Textile - Garment SI

485

524

605

Textile - Garment Industry

2680

3170

4138

Leather - Footwear SI

33

33

40

Leather - Footwear Industry

565

631

786

Machinery SI

1745

2271

2984

Machinery Industry

2016

2359

2944

Electrical/Electronic SI

120

151

219

Electrical/Electronic Industry

740

828

1011

Automobile/Motorcycle SI

260

274

313

Automobile/Motorcycle Industry

48

51

55

 

Source: Calculated from the Enterprise Survey in 2007, 2008 and 2009 of GSO, Vietnam

      Among SIs, the machinery sector accounts for the biggest proportion in the period with over 70% of total number of SI enterprises in all sectors, and is followed by textile-garment SI. The machinery sector has a fairly even ratio between the assembly industries and supporting industries while other sectors such as leather-footwear and electrical/electronic SI is a relatively small proportion of SI enterprises. In fact, around 70%[6] and 60%[7] of raw materials in the textile – garment and leather-footwear sectors, respectively is imported from abroad. Over the years, the number of enterprises in the auto industry has remained constant while machinery industry and electrical/electronic industry has tended to increase.

      According to the Enterprise Survey in 2007, 2008 and 2009 of GSO, Vietnam, if classified by type of ownership, nearly 86.0% of SI enterprises are primarily in the private sector, followed by the foreign investment enterprises at 11.6%. Although the focus of these two ownership sectors is reasonable, in developing countries, solid SI needs to rely on and be supported by FDI sector. The foreign enterprises with the advantage of technology and marketing are more likely to participate in regional and global production networks than domestic firms.

4.Local procurement of Materials and Parts

MNC assemblers are trying to increase the local procurement ratio and to decrease the ratio of parts imports to reduce transaction costs and other production costs. However, the share of production materials and parts sourced locally is smaller in Vietnam than in other ASEAN countries.

Figure 3: Average Local procurement Ratios in ASEAN

 

Source: Japanese External Trade Organization (JETRO). Japanese-Affiliated Manufacturers in Asia – Survey 2004, 2007, 2010 and 2012.

      Figure 3 shows that among four ASEAN countries, Vietnam has the smallest procurement ratio. An upward trend in this ratio was seen from 2003 until 2012, but the increase is relatively small, from 22.6% in 2003 to 27.9% in 2012. In this year, Vietnam’s procurement ratio is much less than Thailand and Malaysia, 27.9% compared with 52.9% and 42.4%, respectively.

      With regard to the procurement sources, there are two sources, local companies and foreign-affiliated companies including Japan, ASEAN countries, Korea, China, Taiwan, etc. In 2012, the local procurement ratio in Vietnam is 27.9%, in which, local companies accounts for 45%, followed by Japanese-affiliated companies at 36.7%, and other foreign-affiliated companies from China, Taiwan, Korea, etc. at 18.3%. (Figure 4)

Figure 4: Local procurement sources for raw materials and parts

 

Source: Japanese External Trade Organization (JETRO). Japanese-Affiliated Manufacturers in Asia – Survey 2012.

      Vietnam’s average ratio of procurement from other foreign-affiliated countries is relatively high (18.3%) compared with other countries, which indicates that the country procures from neighboring countries with high degrees of industry agglomeration such as Thailand, Malaysia and Singapore. According to the 2007 survey of Japanese-affiliated firms in ASEAN and India, Japan External Trade Organization (JETRO), in answering the survey question of what factors would be necessary to increase local procurement rates of raw materials and parts (multiple answers), almost all companies in Vietnam cited “Quality improvement of raw materials and parts by local suppliers” (96.2%) while the next common answers were “Strict observance of delivery dates of raw materials and parts by local suppliers” (50.0%) and “Cost reduction of raw materials and parts by local suppliers” (42.3%). However, a high percentage (69.2%) of companies in Vietnam responded that they would increase the ratio of procurement from the local sources, suggesting that the urgent problem is the improvement of quality and delivery, and reduction of costs to meet the requirement of MNCs in Vietnam, and to improve supporting industries in Vietnam.

5.SI development policies in Vietnam

In the Strategy and Planning of Development System of Vietnam, the Strategy of Economic and Social development is an important orientation text, which is created every ten-year period. On the basis of Strategy of Economic and Social development, each local government will conduct their own Strategy for each industry. In particular, SI may be referred to an industry development plan, implemented on a national scale (Decision No. 34/2007/QD-BCN). Besides, there are also plans of SI development in local level, such as in Hanoi, Ho Chi Minh City and the central part of Vietnam. On the basis of development plan and strategy, the State will have policies for each sector. So far, Vietnam does not have a specific office responsible for SI development. Therefore, policies for these industries are indirect, scattered in many different policies. For example, the policy on Development of Small and Medium Enterprises aims to directly encourage the establishment of new businesses in all sectors, including SI.

In 2007, Ministry of Industry (now is Ministry of Trade and Industry) approved the Decision No. 34/2007/QD-BCN on the Master Plan of Supporting Industries in Vietnam until 2010, vision to 2020. This is the first official document that directly addresses the problems of SI development and presents the State’s recognition on the importance of SI. In Asian countries such as Thailand and Malaysia, SI has been well recognized and promoted from 1990s but in 2000s, in Vietnam it is first mentioned. However, this is the first time when Vietnam had a legal document to address the role of SI and policy frameworks were given as well. The Master Plan can also be considered as the formal assessment on the status of SI in Vietnam. Although there were some previous studies on this issue conducted by Japanese side (especially by Vietnam Development Forum (VDF)), the analysis of the weaknesses in these industries insists on the urgency of SI development in Vietnam.

Up to now, there are 6 official documents on Supporting Industry development approved by the government.


 

Table 3: Decisions on Supporting Industries

No

Decision Number

Title

Date

1

34/2007/QD-BCN

Decision on Approval of Master Plan of Supporting Industries until 2010, vision to 2020

31/07/2007

2

12/2011/QD-TTg

Decision on Policies on development of a number of Supporting Industries

24/02/2011

3

96/2011/TT-BTC

Circular on Policies on Incentives for development of Supporting Industries

04/07/2011

4

1483/QD-TTg

Decision on Promulgating the list of products of Supporting Industries prioritized for development

26/08/2011

5

9734/BTC-CNg

Official letter on Procedure on application of Incentives Policy for development of SI and authorities of approval to apply the Incentives

20/10/2011

6

1556/QD-TTg

Decision on approving the Scheme "Supporting the development of Medium and Small Enterprises engaged in Supporting Industries"

17/10/2012

Source: Compiled by the author

In the above legal documents related to SI development, the specific policies introduced by them are as follows:

In terms of market development promotion, SI products may be advertised and introduced free of charge on the websites of the Ministry of Industry and Trade and provincial-level Industry and Trade Departments; enterprises engaged in SI shall be prioritized for receiving funds from trade and investment promotion programs.

Regarding infrastructure-related promotion, projects to manufacture SI products shall be prioritized for support and allocation of land areas of suitable area, location and rent rate. In addition, enterprises in SI using land in industrial parks and clusters may use infrastructure works and public and other services therein; receive assistance and be given opportunities in labor recruitment and training. SMEs in SI are entitled to incentives for production under the Government’s Decree No. 56/2009/ND-CP of June 30, 2009, on development assistance for SMEs.

 In respect to promotion in science and technology and human resource training, SI enterprises shall be considered and supported by the national scientific and technological development fund and other funds related to scientific and technological activities to cover part of their expenses for technology transfer, purchase of design copy right, purchase of software and hire of foreign experts, etc.

 In terms of finance support, SI enterprises are entitled to import and export duty incentives under the current law on import duty and export duty; and they may be considered for borrowing state development investment credits. SMEs in SI can benefit from financial assistance policies under the Government's Decree No. 56/2009/ND-CP of June 30, 2009 on development support for SMEs.

 Several policies related to promotion of SI have been adopted in recent years but they have not been implemented effectively. Beside the above mentioned policies, the policies on attracting FDI in SI should be an important focus to increase the positive externalities for the productivity growth of domestic suppliers. Other support programs such as collaborative training courses and business matching programs may generate positive effect on developing SI in Vietnam. Some specific recommendations will be suggested in Chapter VI. In the next chapter, however, the econometric model used to analyze the determinants of firm performance will be presented in detail.

 


 

CHAPTER IV

METHODOLOGY

1.Econometric Model

In this chapter, an econometric model is developed to quantitatively analyze the performance and factors influencing the performance of Vietnamese SI enterprises using firm-level data from a survey of SMEs in 2009. The econometric model is derived from the production function. There are two most common functional forms which are the Cobb-Douglas production function and the Translog production function.

The general production function can be expressed in the functional form:

 Y = f (K, L)                                                                                                                 (1)

The Cobb-Douglas production function is a specific form of (1) as follows:

                                                                                                               (2)

where:

Y = quantity of output

K = capital input

L = labor input

A = total factor productivity

α and β are the output elasticities of capital and labor, respectively.

The logarithmic form of Cobb-Douglas function is given by:

lnYi = β0 + β1lnKi + β2lnLi + Ui                                                                                                        (3)

The translog specification is expressed as follows:

lnYi = β0 + β1lnKi + β2lnLi + 1/2β3lnKi.lnKi + 1/2β4lnLi.lnLi5lnKi.lnLi  + Ui                  (4)

where

Yis the output of firm i

Ki is the capital input of firm i

Li is the labor input of firm i

Ui is the error term

To test for functional form, an F-test is calculated to test the null hypothesis that the Cobb-Douglas production function is an adequate representation of the data

H0: β3 = β4 = β5 = 0

The result of the F-test (P value (0.24) is insignificant at the 5% level, thus we cannot reject the null hypothesis) determines that the Cobb-Douglas production function (3) is the appropriate functional form for this study.

Then, the Cobb-Douglas specification can be expressed as follow:

lnYi = β0 + β1lnKi + β2lnLi + Vi + Ui                                                                                           (5)

where Vi is a vector of firm characteristics (gender and education level of firm owner/manager, firm age, access to finance, production innovation, business registration, firm location, industry sector, ownership type, etc.)

2.Data and variables

This study uses recent firm-level data from a survey on Vietnamese small and medium enterprises in 2009. The survey was conducted by the Vietnamese Institute for Labor Sciences and Social Affairs (ILSSA), the Central Institute for Economic Management (CIEM), and the University of Copenhagen. A summary of the statistics of the raw data is given in Table 4.


 

Table 4: Summary of the raw data

Location

Household

enterprise

Private/sole proprietorship

Partnership/Collective/Cooperative

Limited liability company

Joint stock company

Total

The North

Ha Noi

108

24

21

106

24

283

Phu Tho

223

4

4

21

6

258

Ha Tay

309

11

4

47

5

376

Hai Phong

118

14

18

41

19

210

Sub-total

758

53

47

215

54

1127

The Central

Nghe An

278

21

7

29

18

353

Quang Nam

122

9

4

21

2

158

Khanh Hoa

58

16

1

17

2

94

Sub-total

458

46

12

67

22

605

The South

Lam Dong

53

8

0

6

1

68

HCMC

322

76

12

197

9

616

Long An

99

16

1

11

0

127

Sub-total

474

100

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